A tough year for precious metals ends — but another awaits

December 31, 2015, 8:13am

By A Ananthalakshmi, Reuters on Business Day Live
Photo: iStock

SINGAPORE — Gold was little changed on the last trading session of the year, but is set to post its third straight annual loss, undermined by a robust dollar and prospects of higher US interest rates.

Investors have sold off the metal, which is down about 10% for the year, on fear that higher US interest rates would dent the appeal of bullion as it does not pay interest.

Other precious metals have also been hit by the strength in the dollar and the slump in gold, and were headed for sharp annual declines.

Spot gold edged up 0.2% to $1,062.50 an ounce by 3.31am GMT on Thursday. Volumes were thin ahead of the New Year holiday on Friday.

It slid to a nearly six-year low of $1,045.85 earlier in December.

"Next year too gold will be lower as US interest rates will keep going higher," said a bullion trader in Hong Kong, adding that this would put pressure on other precious metals as well.

Gold could drop to $1,000 or below but could recover slightly in the second half of the year, he said.

The outlook for the metal does not look bullish heading into the next year. Gold prices have been influenced a great deal by US monetary policy. The Federal Reserve increased US interest rates for the first time in nearly a decade in December, and is expected to raise rates at a gradual pace in 2016.

That could support the dollar, which is on track to gain 9% this year against a basket of major currencies. A stronger greenback makes dollar-denominated gold more expensive for holders of other currencies.

"The pace of increasing interest rates is going to be slow but still that would depress gold prices," said Mark To, head of research at Hong Kong’s Wing Fung Financial Group.

Physical demand in top consumers China and India would not be strong enough to support a price rally, he said.

Other fundamentals were also not supportive of an uptick in prices. Assets of SPDR Gold Trust, the top gold-backed exchange-traded fund, are near a seven-year low, while short positions on Comex gold contracts are close to a record high.

A bearish outlook for oil could pile more pressure on gold.

Gold is positively correlated to oil as the metal is often seen as a hedge against oil-led inflation.

Among other precious metals, silver looked set to end the year down about 11%. Platinum was headed for a 27% decline, its worst annual performance since 2008.

With a 31% drop, palladium was the worst performer among the precious metals.

Silver was up just more than 1c or 0.74% at $13.96, platinum added 40c or 0.05% to $870.40 and palladium gained $8.43 or 1.56% to $550.